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Diversification Benefits of iShares and Closed-End Country Funds

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  • Anita K. Pennathur
  • Natalya Delcoure
  • Dwight Anderson

Abstract

We study the performance and diversification of iShares and their rival closed-end country funds from April 1996 to December 1999. International iShares are country-specific series of securities that track the price and yield of a specific Morgan Stanley Capital Internation (MSCI) country index and, presumably, should provide diversification benefits. Our single-index model demonstrates that iShares replicate the home index, showing some potential for diversification. However, our two-factor model, which isolates the "true" diversification virtues, documents that both iShares and closed-end country fund market prices maintain considerable exposure to the U.S. market. Furthermore, the net asset value returns of the closed-end funds demonstrate a strong home country exposure, suggesting there is no substitute for direct foreign investment. 2002 The Southern Finance Association and the Southwestern Finance Association.

Suggested Citation

  • Anita K. Pennathur & Natalya Delcoure & Dwight Anderson, 2002. "Diversification Benefits of iShares and Closed-End Country Funds," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(4), pages 541-557.
  • Handle: RePEc:bla:jfnres:v:25:y:2002:i:4:p:541-557
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    Cited by:

    1. Chelley-Steeley, Patricia & Park, Keebong, 2011. "Intraday patterns in London listed Exchange Traded Funds," International Review of Financial Analysis, Elsevier, pages 244-251.
    2. Chelley-Steeley, Patricia & Park, Keebong, 2010. "The adverse selection component of exchange traded funds," International Review of Financial Analysis, Elsevier, pages 65-76.
    3. M. Barari & Brian Lucey & S. Voronkova, 2008. "Reassessing co-movements among G7 equity markets: evidence from iShares," Applied Financial Economics, Taylor & Francis Journals, pages 863-877.
    4. Gutierrez, Jose A. & Martinez, Valeria & Tse, Yiuman, 2009. "Where does return and volatility come from? The case of Asian ETFs," International Review of Economics & Finance, Elsevier, pages 671-679.
    5. Terhi Jokipii & Brian Lucey, 2005. "CEE Banking Sector Co-Movement: Contagion or Interdependence?," The Institute for International Integration Studies Discussion Paper Series iiisdp077, IIIS.
    6. Huang, Mei-Yueh & Lin, Jun-Biao, 2011. "Do ETFs provide effective international diversification?," Research in International Business and Finance, Elsevier, pages 335-344.
    7. Yang, Jian & Cabrera, Juan & Wang, Tao, 2010. "Nonlinearity, data-snooping, and stock index ETF return predictability," European Journal of Operational Research, Elsevier, pages 498-507.
    8. Chen, Honghui & Morse, Joel N. & Nguyen, Hoang Huy, 2009. "Changes in the liquidity of closed-end country funds after the introduction of World Equity Benchmarks," The Quarterly Review of Economics and Finance, Elsevier, pages 1081-1094.
    9. Tse, Yiuman & Martinez, Valeria, 2007. "Price discovery and informational efficiency of international iShares funds," Global Finance Journal, Elsevier, pages 1-15.
    10. Samuel Jones & Michael Stroup, 2013. "Economic freedom and the mispricing of single-state municipal bond closed-end funds," Journal of Economics and Finance, Springer;Academy of Economics and Finance, pages 173-187.
    11. Laurent Deville, 2008. "Exchange Traded Funds: History, Trading and Research," Post-Print halshs-00162223, HAL.
    12. Harper, Joel T. & Madura, Jeff & Schnusenberg, Oliver, 2006. "Performance comparison between exchange-traded funds and closed-end country funds," Journal of International Financial Markets, Institutions and Money, Elsevier, pages 104-122.
    13. David Puelz & Carlos M. Carvalho & P. Richard Hahn, 2015. "Optimal ETF Selection for Passive Investing," Papers 1510.03385, arXiv.org, revised Nov 2015.
    14. Vinay Datar & Raymond So & Yiuman Tse, 2008. "Liquidity commonality and spillover in the US and Japanese markets: an intraday analysis using exchange-traded funds," Review of Quantitative Finance and Accounting, Springer, pages 379-393.
    15. Hughen, J. Christopher & Mathew, Prem G., 2009. "The efficiency of international information flow: Evidence from the ETF and CEF prices," International Review of Financial Analysis, Elsevier, pages 40-49.
    16. O'Hagan-Luff, Martha & Berrill, Jenny, 2015. "Why stay-at-home investing makes sense," International Review of Financial Analysis, Elsevier, pages 1-14.
    17. Mahua Barari & Brian Lucey & Svitlana Voronkova, 2005. "CEE Banking Sector Co-Movement: Contagion or Interdependence?," The Institute for International Integration Studies Discussion Paper Series iiisdp078, IIIS.
    18. Shin, Sangheon & Soydemir, Gökçe, 2010. "Exchange-traded funds, persistence in tracking errors and information dissemination," Journal of Multinational Financial Management, Elsevier, pages 214-234.
    19. Lee, Hsiu-Chuan & Hsu, Chih-Hsiang & Lee, Yun-Huan, 2016. "Location of trade, return comovements, and diversification benefits: Evidence from Asian country ETFs," The North American Journal of Economics and Finance, Elsevier, pages 279-296.

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